The banking ban behind the attack on UK embassy

guardian.co.uk

Militants have stormed the British embassy in Tehran, burning the British flag and replacing it with the flag of the Islamic Republic. Fars News Agency, which describes the attack as "spontaneous", says more than 1,000 students were involved. There are reports also of documents being seized, from both the British embassy and the British Council. In their statement, the students call for the breaking of all relations with the UK.

The move comes after Iran's Guardian Council approved a decision by the parliament on Sunday to downgrade diplomatic relations with Britain. The vote was carried when 179 members approved it and some called for the expulsion of the British ambassador, chanting "death to Britain".

Expulsion would mean the British ambassador, Dominick Chilcott, who has been in the post for just over a month, having to be replaced by a chargé d'affaires. The move illustrates Iran's mounting frustration with international sanctions.

The fury was in fact directed at the British chancellor of the exchequer, George Osborne, who had earlier said that all UK credit and financial institutions had to cease trading with Iran's banks. This was the first time the UK had cut off a country's banking sector targeting Iran's Central Bank. Sanctions on the bank would have drastic consequences for Iran's economic transactions mostly dominated by the powerful Revolutionary Guards.

Only two weeks earlier, Mahmoud Ahmadinejad admitted for the first time the effects sanctions had had. "This has been the biggest offensive in history at Iran's economy," the president said, addressing the parliament that wanted to impeach his minister of economy. "All our banking operations, all our trade, all our purchases and sales, all our agreements are being monitored and blocked."

But the vote in the Iranian parliament was not as unanimous as it appeared. According to Fars News Agency, of the 290 MPs only 196 were present; four had voted against with 11 abstentions. That suggests nearly 110 members had decided to oppose the bill either through voting or by staying away. There is a proviso in small print saying the bill could be revoked if Britain "changed its hostile manner".

Britain's Foreign Office said it would respond "robustly" if Iran expelled Chilcott. The British foreign secretary, William Hague, said he would consult international partners on what measure to take. He described the Iranian parliament's move as "regrettable, unwarranted and counter-productive". However, Britain cannot retaliate if the ambassador is expelled since Iran does not have an ambassador in the UK.

Relations between Iran and Britain have gone through several stages of intense crisis since the revolution of 1979 and again after Ayatollah Khomeini's fatwa against the British writer, Salmon Rushdie, when relations were cut. During the pre-reform period of the 1990s relations were raised to chargé d'affaires level and as a result of intense behind the scenes diplomacy during the reform era of Mohammad Khatami relations were normalised after 1998. In 2001 the then foreign secretary Jack Straw became the first high-ranking British official to visit the Islamic republic.

Over the past two years relations between Iran and the UK have sharply deteriorated, especially after the setting up of the BBC Persian TV in 2009. Officials see the BBC as Britain's "soft war" against Tehran. They jammed the channel, closed the BBC office in Tehran and arrested and intimidated anyone who co-operated with or was interviewed by the channel.

During the post-election protests of 2009 in Iran, eight members of British embassy's Iranian staff were arrested and one, Hossein Rassam, was jailed for four years accused of "acting against national security" – a charge often used in fabricated court cases against the opposition. Rassam's charge was later suspended but he was banned from working for the British embassy.

Britain was also embroiled in a bitter political feud at the highest level of Iranian politics as Tehran's mayor plotted the forcible seizure of the sprawling British ambassador's residence and gardens in Tehran.

These latest moves take Iran's confrontation with the west to a new level. Iran's isolation is set to increase further. The move by the parliament has made Iran even more vulnerable to further sanctions from the west. These could be paralysing if the US joins in with targeting the central bank. This in turn is set to cause further tensions and divisions from within.